M12 MILL3060 12ce ISM C12

Chapter 12
Partnerships
Questions
1. Nine items that the partnership agreement should specify are (only five
are required):
1. Name, location, and nature of the business.
2. Names, capital investments, and duties of each partner.
3. Method of sharing profits and losses by the partners.
4. Cash/other asset withdrawals allowed to the partners.
5. Procedures for settling disputes among the partners.
6. Procedures for admitting new partners.
7. Procedures for settling up with a partner who withdraws from the
business.
8. Procedures for liquidating the partnership.
9. Procedures for removing a partner who will not withdraw or retire
from the partnership voluntarily.
2. Mutual agency describes a partner’s ability to obligate the business to a
contract.
3. If the partnership cannot pay a debt, the partners must. Unlimited liability
describes this personal obligation of the partners.
4. A partnership pays no income tax on its business income. Partners pay
income tax as individuals on their shares of partnership income.
5. The great advantage of a partnership is that it combines the capital,
talents, and experience of two or more persons. Also, a partnership pays
no business income tax.
A disadvantage is that as partners enter and leave the business, the
partnership must be dissolved and reformed. Drawing up a new
partnership agreement for each new partnership may be expensive and
time consuming. However, the principal disadvantages of a partnership
are mutual agency and the unlimited personal liability of partners for
business debts. A dishonest or unwise partner can cause trouble—even
the financial ruin of the other partners.
6. An LLP is designed to protect innocent partners from negligence
damages that result from another partner’s actions. This means that each
partner’s personal liability for other partners’ negligence is limited to a
certain dollar amount, although liability for a partner's own negligence is
still unlimited.
12-940 Copyright © 2023 Pearson Canada Inc.

Horngren’s Accounting, 12Ce Chapter 12 Instructor’s Solutions Manual
7. A partnership balance sheet reports partner capital for each partner. A

partnership statement of partners’ equity shows the changes in partner
capital for each of the partners. A partnership income statement includes
a section showing the division of net income to the partners. Otherwise,
partnership financial statements are much like those of a proprietorship.
8. This person would be a limited partner, so named because his or her
personal obligation for the partnership’s liabilities is limited to the
amount he or she invested in the business.
9. Partners share losses in the same ratio that they share profits if the
partnership agreement does not discuss sharing the losses. If the
agreement specifies no profit-and-loss-sharing ratio, the partners share
profits and losses equally.
10. The current market value of the assets contributed to a partnership
determines the amount of the credit to the partner’s capital account.
11. Partner withdrawals of cash for personal use do not affect the sharing of
profits and losses by the partners. Their shares of profits and losses are
based on the profit-and-loss-sharing ratio, which is determined separately
from their cash withdrawals.
12. The partnership debits the withdrawing partner’s capital account and
credits the new partner’s capital account. The dollar amount of this entry
is the withdrawing partner’s capital balance, not the amount of cash paid.
This is basically a name change on the capital account.
13. Malcolm obtains the right to share in the profits and losses of the
partnership. Malcolm must gain Conners’ approval before becoming a
partner.
14. Partnership capital before Kaur is admitted
($150,000 + $150,000) $300,000
Kaur’s investment in the partnership 100,000
Partnership capital after Kaur is admitted $400,000
Kaur’s capital in the partnership ($400,000 × 1/5) $ 80,000
Kaur, Capital $ 80,000
Assissi, Capital [$150,000 + 0.55 × ($100,000 – $80,000)] 161,000
Zahari, Capital [$150,000 + 0.45 × ($100,000 – $80,000)] 159,000
Total partnership capital $400,000
15. Four events dissolve a partnership: withdrawal of a partner, death of a
partner, admission of a new partner, and liquidation of a partnership.
Note: Students need name only two of these events.
Copyright © 2023 Pearson Canada Inc. 12-941

16. Dissolution is the termination of a partnership. Dissolution may occur

because of the admission of a new partner, the withdrawal or death of an
existing partner, or the liquidation of the business. Liquidation is the
process of going out of business by selling the assets, paying all business
debts, and paying any remaining cash to the owners.
17. The three steps in liquidating a partnership are (1) selling the assets of
the entity, (2) paying its liabilities, and (3) paying any remaining cash to
the partners.
18. Ralls and Sauls share (a) gains and losses on the sale of noncash assets
based on their profit-and-loss-sharing ratio and (b) the final cash
distribution based on their capital balances.
19. All net income or net loss and all gains and losses on the sale of assets
are allocated based on the profit-and-loss-sharing ratio. This includes
bonuses to partners when new partners are admitted, capital adjustments
arising from asset revaluations when partners withdraw from the
business, and capital deficiencies in liquidation. The only allocation that
is based on the partners’ capital balances is the disbursement of assets to
partners, such as in Step 3 in a liquidation.
20. When a partner’s capital balance has a debit balance (negative) this is
called a capital deficiency. It means that the partner owes money to the
partnership.

Starters
(5 min.) S12-1
1. Yes, the partnership form of business organization is appropriate in this situation
because a law practice or professional association is not entitled to incorporate
and limit liability to the public. Lawyers must use the partnership form of
organization. However, each partner could form a personal corporation and have
their salary paid to that individual company. The corporation may be able to pay
tax at a lower rate than an individual depending on the type of corporation
created.
2. Yes, I would recommend starting out as a partnership to determine if this will be
a synergistic arrangement. The partnership is not profitable yet, so there is no
tax advantage to incur the cost of incorporating, which can be done later if
necessary.
(10 min.) S12-2

T & W PARTNERSHIP
Statement of Partners’ Equity
For the Year Ended December 31, 2023
Tarlier Won Total
Capital, January 1, 2023 $45,000 $60,000 $105,000
Investments 10,000 10,000 20,000
Net income for the year 33,900 22,100 56,000
Subtotal 88,900 92,100 181,000
Less: Withdrawals 12,000 12,000 24,000
Capital, December 31, 2023 $76,900 $80,100 $157,000

(5–10 min.) S12-3

Req. 1
General Journal
Post.
Date Account Titles and Explanations Ref. Debit Credit
Oct. 15 Cash 600,000

Land 80,000
Building 100,000
Equipment 90,000
Mortgage Payable 110,000
K. June, Capital 270,000
S. Wiley, Capital 490,000
To set up partnership.
Req. 2
Total Assets = $600,000 + $80,000 + $100,000 + $90,000 = $870,000

Total Liabilities = $110,000
Total Partners’ Equity = $270,000 + $490,000 = $760,000
Verify that A = L + E: $870,000 = $110,000 + $760,000
(15 min.) S12-4

RJO ENTERPRISES
Balance Sheet
June 30, 2022
Assets Liabilities
Cash $175,000 Accounts payable $ 30,000
Inventory 105,000
Land 150,000 Partners’ Equity
R. Reeves, capital 150,000
J. Bateman, capital 175,000
O. Morali, capital 75,000
Total partners’ equity $400,000
Total assets $430,000 Total liabilities and equity $430,000

(5–10 min.) S12-5

1. Abel: $4,000 × ½ = $2,000
Baker: $4,000 × ½ = $2,000
Remember: In the absence of a partnership agreement, profits and losses are shared
equally.
2. Abel: $40,000 + $15,000 + $10,000 – $20,000 = $45,000
Baker: $10,000 + $50,000 = $60,000
Abel, Capital Baker, Capital
Loss 2,000 45,000 Loss 2,000 60,000
Bal. 43,000 Bal. 58,000
(10 min.) S12-6

Friesen Walters Onley Total
Total net income $94,000
a. Sharing of first $40,000 of net income

based on capital investments:
Friesen ([$12,000 / $24,000] × $40,000) $20,000
Walters ([$6,000 / $24,000] × $40,000) $10,000
Onley ([$6,000 / $24,000] × $40,000) $10,000
Total $40,000
Net income remaining for allocation $54,000
b. Sharing of next $30,000 based on service:

Friesen ($30,000 × ½) 15,000
Onley ($30,000 × ½) 15,000
Total 30,000
Net income remaining for allocation 24,000
c. Remainder shared equally:

Friesen ($24,000 × ⅓) 8,000
Walters ($24,000 × ⅓) 8,000
Onley ($24,000 × ⅓) 8,000
Total 24,000
Net income remaining for allocation $ 0
Net income allocated to the partners $43,000 $18,000 $33,000 $94,000

(5–10 min.) S12-7

JE-HONG AND BARTON
Income Statement
For the Year Ended September 30, 2023
Service revenue $145,000
Total expenses 85,000
Net income $ 60,000
Allocation of net income:
To Je-hong ($60,000 × 0.60) $ 36,000
To Barton ($60,000 × 0.40) 24,000 $ 60,000
Je-hong, Capital
Balance 30,000
Withdrawal. 0 Net income 36,000
Ending balance 66,000
Barton, Capital
Balance 10,000
Withdrawal. 0 Net income 24,000
(5–10 min.) S12-8

General Journal
Post.
Aug. 1 Carlson, Capital 55,000
Reynaldo, Capital 55,000
To admit Reynaldo as a partner.
Carlson keeps the full $175,000, including the $120,000 difference between
Reynaldo’s payment ($175,000) and Carlson’s capital balance ($55,000). This
is a personal gain to Carlson.

(5–10 min.) S12-9

Req. 1
There is no bonus to any partner, as shown here:
Partnership capital before Gray is admitted ($60,000 + $80,000) $140,000
Gray’s investment in the partnership ............................................................. 70,000
Partnership capital after Gray is admitted ...................................................... $210,000
Gray’s capital in the partnership—same as her investment;
no bonus ($210,000 × ⅓) ............................................................................ $ 70,000
Req. 2
General Journal
Post.
Feb. 1 Cash 70,000
Joan Gray, Capital 70,000
To admit Gray as a partner with a ⅓ interest
in the business.

(10 min.) S12-10

Partnership capital before Mo is admitted
($115,000 + $75,000) ........................................................ $190,000
Mo’s investment in the partnership........................................ 70,000
Partnership capital after Mo is admitted ................................ $260,000
Mo’s capital in the partnership ($260,000 × 0.20) ................. $ 52,000
Bonus to Bo and Go ($70,000 – $52,000) ............................. $ 18,000
General Journal
Post.
May 21 Cash 70,000

Bo, Capital 10,800
Go, Capital 7,200
Mo, Capital 52,000
To admit Mo as a partner with a 20% interest
in the business. Bonus to the existing
partners.
Bo: $10,800 = $18,000 × 60%
Go: $7,200 = $18,000 × 40%
(5–10 min.) S12-11

Chapman can take assets of $75,000 which is the amount of Chapman’s
capital balance in the business. The profit-and-loss-sharing ratio is not used
because the business is distributing assets to an owner. The business is not
dividing profits or losses among the partners.

(5–10 min.) S12-12

General Journal
Date Account Titles and Explanations Debit Credit
Aug. 31 Sean, Capital 40,000

Mohid, Capital 4,000
Beth, Capital 6,000
Cash 30,000
To record withdrawal of Sean from the business. Mohid’s
Capital is increased by $4,000 [($40,000 – $30,000) × 2/5]
and Beth’s Capital is increased by $6,000 [($40,000–
$30,000) × 3/5].
(10–15 min.) S12-13

General Journal
Post.
a. Jul. 31 Land 20,000
Simpson, Capital 5,000
Locke, Capital 10,000
Job, Capital 5,000
To revalue the land from $50,000 to $70,000
and allocate the gain to the partners.
b. Jul. 31 Simpson, Capital 32,000

Cash 32,000
To record withdrawal of Simpson from the
Partnership ($27,000 + $5,000)
Simpson & Job .............................. $5,000 = ($20,000 × ¼)

Locke ........................................... $10,000 = ($20,000 × ½)

(10 min.) S12-14

Capital
Noncash Lauren Andrews Benroudi
Cash + assets = Liabilities + (60%) + (20%) + (20%)
Balance before sale of assets $10,000 $90,000 $30,000 $40,000 $20,000 $10,000
Sale of assets and sharing of loss* 80,000 (90,000) ______ (6,000) (2,000) (2,000)
Balances 90,000 0 30,000 34,000 18,000 8,000
Payment of liabilities (30,000) ______ (30,000) ______ ______ ______
Balances 60,000 0 0 34,000 18,000 8,000
Disbursement of cash to partners (60,000) ______ ______ (34,000) (18,000) (8,000)
Balances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
*Loss = $90,000 – $80,000 = $10,000

Lauren: $10,000 × 0.60 = $6,000
Andrews: $10,000 × 0.20 = $2,000
Benroudi: $10,000 × 0.20 = $2,000

(10 min.) S12-15

General Journal
Post.
Oct. 31 Cash 80,000
Ryan Lauren, Capital 6,000
Alexis Andrews, Capital 2,000
Scott Benroudi, Capital 2,000
Noncash Assets 90,000
To sell assets at a loss.
31 Liabilities 30,000
Cash 30,000
To pay liabilities.
31 Ryan Lauren, Capital 34,000

Alexis Andrews, Capital 18,000
Scott Benroudi, Capital 8,000
Cash 60,000
To pay the partners in final liquidation of the
business.
(5–10 min.) S12-16

The partners have two options to deal with a negative capital balance in a liquidation:
1. If the partner has personal assets, then that partner would pay in the balance, that
partner is released from further obligation, and the other partners would receive their
remaining amounts.
2. If the partner does not have personal assets, then that partner’s balance would be
absorbed using the profit-and-loss-sharing ratio. Benroudi would not be released
from further obligation and if he does not sign a promissory note (or signs a note and
does not pay), then he could be sued personally by the other partners. The partners
would then receive their remaining amounts. In that case, Benroudi’s balance would
be absorbed by Lauren ($6,000) and Andrews ($2,000).

Exercises
(5–10 min.) E12-1
Giltrow’s errors were as follows:
1. A partner has unlimited personal liability for the obligations of the
partnership. Therefore partnerships are very risky for a partner,
especially because each partner can bind the business to a contract within
the scope of the partnership’s normal operations.
2. A partner cannot necessarily take from the business the same assets that
he or she invested at the beginning. If the business fails, a partner may
lose some or all of the assets he or she invested.
3. Partnerships pay no business income tax, so they are not subject to
double taxation. Instead, all the profits of a partnership are divided
among the partners, who then pay personal income tax on their share of
the business’s net income.
(10–15 min.) E12-2

The main advantage of organizing a business as a partnership, rather than as a
proprietorship, is the ability to bring together the capital, talents, and
experiences of the partners. Two or more owners can provide more capital
than can a single owner. Like a proprietorship, the partnership pays no
business income tax. Instead, the partnership income is taxed as personal
income to the partners.
The partnership form of business has some disadvantages. Partnerships are
somewhat like marriages. Euphoria at the start of the venture can turn sour if
the partners do not get along well. Each partner can bind the business to a
contract that gives every partner unlimited personal liability for the debts of
the business if it cannot pay. One partner making some mistakes or acting in
an undesirable manner can create losses for the other partner(s). In the
extreme case, a partner may grow disenchanted with participation in the
business. If a partner leaves the business, the old partnership dies, and
reorganization becomes necessary. Preparing a partnership agreement can
consume a great deal of time and energy but is definitely worth it to protect
the parties engaged in this business arrangement.

(10 min.) E12-3

Req. 1
(All amounts in millions)
General Journal
Post.
Nov. 10 Cash 3.0
Land 30.0
Note Payable 6.0
Jackson Cooke, Capital 27.0
To record Cooke’s investment in the
partnership.
10 Cash 15.0
Equipment 8.0
Julia Bamber, Capital 23.0
To record Bamber’s investment in the
partnership.
Req. 2
(All amounts in millions)
Total assets $3 + $30 + $15 + ($14 – $6)* = $56
Total liabilities: $ 6
Total partners’ equity: $27 + $23 = $50
* equipment value is $8 ($14 – $6)

(10–15 min.) E12-4

Req. 1
General Journal
Date
2022 Account Titles and Explanations Debit Credit
Dec. 31 Cash 9,000
Accounts Receivable 21,000
Artwork (Inventory) 43,000
Building 108,000
Accounts Payable 23,000
Other Accrued Payables 13,000
Notes Payable 53,000
Johnson, Capital 92,000
To record Johnson’s contribution.
Dec. 31 Cash 3,000

Artwork (Inventory) 40,000
Building 58,000
Brooks, Capital 103,000
To record Brooks’s contribution.
Req. 2
JOHNSON AND BROOKS
Balance Sheet
December 31, 2022
Assets Liabilities
Cash $ 12,000 Accounts payable $ 35,000
Accounts receivable 35,000 Other accrued payables 13,000
Artwork (Inventory) 83,000 Notes payable 53,000
Buildings 166,000 Total liabilities 101,000
Partners’ Equity
Johnson, capital 92,000
Brooks, capital 103,000
Total partners’ equity 195,000

(10–15 min.) E12-5

Req. 1
General Journal
Post.
Jan. 1 Cash 24,000
Equipment 36,000
Buildings 90,000
Land 86,000
Note Payable 17,000
Daniel Noel, Capital 194,000
To record Noel’s contribution.
1 Cash 18,500
Equipment 52,000
Buildings 140,000
Land 80,000
Note Payable 28,000
Daisy Ha, Capital 237,500
To record Ha’s contribution.
Req. 2
DANIEL AND DAISY PARTNERSHIP
Balance Sheet
January 1, 2022
Assets Liabilities
Equipment 88,000 Notes payable 45,000
Buildings 230,000 Total liabilities $95,000
Land 166,000
Partners’ Equity
Daniel Noel, capital $194,000
Daisy Ha, capital 237,500

(15–20 min.) E12-6

Partners’ shares of net income and net loss:
Net Income (Net Loss)
Danolo Goldman Total
a. Half to each partner $(62,400) $(62,400) $(124,800)
b. Danolo [$96,000/($96,000 + $168,000) × $105,600] $ 38,400

Goldman [$168,000/($96,000 + $168,000) ×
$105,600] $ 67,200 $105,600
c. Total net income $264,000

Sharing of first $132,000 based on capital
balances:
Danolo [$96,000/($96,000 + $168,000) ×
$132,000] $ 48,000
Goldman [$168,000/($96,000 + $168,000) ×
$132,000] $ 84,000 132,000
Sharing based on service:

Danolo ($100,000 × 0.40) 40,000
Goldman ($100,000 × 0.60) 60,000 100,000
Balance shared equally:
Danolo ($32,000 × 0.5) 16,000
Goldman ($32,000 × 0.5) 16,000 32,000
Net income allocated to the partners $104,000 $160,000 $264,000

(10–15 min.) E12-7

Each partner’s share of the $92,000 net income for the year:
Harper Cheves Calderon Total
First, based on capital investments:

Harper [$20,000/($20,000 + $30,000 + $ 8,000
$50,000) × $40,000]
Cheves [$30,000/($20,000 + $30,000 +
$50,000) × $40,000] $12,000
Calderon [$50,000/($20,000 + $30,000 +
$50,000) × $40,000] $20,000
Total 40,000
Second, based on service:

Harper 20,000
Cheves 20,000
Total 40,000
Third, remainder shared equally:

Harper ($12,000 × ⅓) 4,000
Cheves ($12,000 × ⅓) 4,000
Calderon ($12,000 × ⅓) 4,000
Total 12,000
Net income allocated to the partners $32,000 $36,000 $24,000 $92,000

(10 min.) E12-8

Oscar Elmo Total
Total income (loss) to be allocated $(11,000)
Allocation for service 25,000 15,000 (40,000)
Net loss remaining for allocation (51,000)
Based on capital accounts 5,000 7,000 (12,000)
Net loss remaining for allocation (63,000)
Balance divided 5:4 ratio (35,000) (28,000) (63,000)
Allocation of Loss $ (5,000) $ (6,000)
Based calculations:
Original investment is $50,000 + $70,000 = $120,000
So $12,000 is split as $5,000 and $7,000
Balance calculation:
$63,000 × 5/9 = $35,000
$63,000 × 4/9 = $28,000

(5–10 min. if completed E12-6, otherwise 30 min.) E12-9

If did not complete E 12-6 then solve this first.
Partners’ shares of net income and net loss:
Net Income (Net Loss)
Danolo Goldman Total
a. Half to each partner $ (62,400) $(62,400) $(124,800)
b. Danolo [$96,000/($96,000 + $168,000) × $105,600] $ 38,400

Goldman [$168,000/($96,000 + $168,000) ×
$105,600] $67,200 $105,600
c. Total net income $264,000

Sharing of first $132,000 based on capital
balances:
Danolo [$96,000/($96,000 + $168,000) ×
$132,000] $ 48,000
Goldman [$168,000/($96,000 + $168,000) ×
$132,000] $84,000 132,000
Net income left for allocation 132,000
Sharing based on service:

Danolo ($100,000 × 0.40) 40,000
Goldman ($100,000 × 0.60) 60,000 100,000
Net income left for allocation 32,000
Balance shared equally:
Danolo ($32,000 × 0.5) 16,000
Goldman ($32,000 × 0.5) 16,000 32,000
Net income left for allocation $ 0
Net income allocated to the partners $104,000 $160,000 $264,000

(cont.) E12-9
General Journal
Post.
Dec. 31 Income Summary 264,000
Ken Danolo, Capital 104,000
Jim Goldman, Capital 160,000
31 Ken Danolo, Capital 148,000

Ken Danolo, Withdrawals 148,000
31 Jim Goldman, Capital 120,000

Jim Goldman, Withdrawals 120,000
Danolo’s capital balance decreased by $44,000 (withdrawals of $148,000 exceeded net

income of $104,000). Goldman’s capital balance increased by $40,000 (net income of
$160,000 exceeded withdrawals of $120,000). Overall, partnership capital decreased by
$4,000 because net income of $264,000 fell short of partner withdrawals of $268,000
($148,000 + $120,000).
(5–10 min.) E12–10

Equity of Goertz $30,000
Neilson’s contribution 17,000
Total equity $47,000
Neilson’s equity interest × 30%
Neilson’s equity after admission $14,100
Neilson’s contribution = $17,000 – $14,100 = $2,900 bonus paid to Goertz.

(10–15 min.) E12-11

Req. 1
Partners’ equity in the partnership:
a. Wang’s balance $ 39,500
Wird’s balance 79,000
Bales’s balance 0
b. Partnership capital before Wang is admitted ($79,000 + $39,500) $118,500

Wang’s investment 39,500
Partnership capital after Wang is admitted 158,000
Wang’s capital in the partnership ($158,000 × 1/4) $ 39,500

Wird’s capital in the partnership 79,000
Bales’s capital in the partnership 39,500
c. Partnership capital before Wang is admitted ($79,000 + $39,500) $118,500

Wang’s investment 71,500
Partnership capital after Wang is admitted $190,000
Wang’s capital in the partnership ($190,000 × 1/4) $ 47,500

Wird’s capital in the partnership $79,000 + [($71,500 – $47,500) × 1/2] 91,000
Bales’s capital in the partnership $39,500 + [($71,500 – $47,500) × 1/2] 51,500
Req. 2
General Journal
Post.
a. Mar. 4 Alan Bales, Capital 39,500
Joanna Wang, Capital 39,500
b. Mar. 4 Cash 39,500

c. Mar. 4 Cash 71,500

Tanya Wird, Capital 12,000
Alan Bales, Capital 12,000
Allocation = $24,000 × 1/2 = $12,000

(10–15 min.) E12-12

1. The profit-and-loss-sharing ratio is Harry 40 percent ($20,000 ÷ $50,000), Sunny 60
percent ($30,000 ÷ $50,000).
2. $50,000
3. Amin received a 20 percent interest. ($175,000 + $50,000 = $225,000; $45,000 ÷

$225,000 = 20 percent.)
4. Harry and Sunny received bonuses. The bonus was $5,000 ($50,000 – $45,000 =
$5,000). Harry’s share of the bonus was $2,000 (40% of $5,000) and Sunny’s share
was $3,000 (60% of $5,000).
5. Harry 10 percent ($8,000 ÷ $80,000), Sunny 70 percent ($56,000 ÷ $80,000), and

Amin 20 percent ($16,000 ÷ $80,000).
(5–10 min.) E12-13

1. Stihl’s partner’s equity before asset write-down $40,500
Stihl’s share of asset write-down ($18,000 × 1/3) (6,000)
Stihl receives assets of $34,500
2. Laksa’s partner’s equity before asset write-down $54,000

Laksa’s share of asset write-down ($18,000 × 2/3) (12,000)
Laksa’s partner’s equity after asset write-down $42,000

(10–15 min.) E12-14

General Journal
Post.
a. May 31 Alana Bruno, Capital 4,800
Robert Kraft, Capital 9,600
Rollon Hamelin, Capital 9,600
Inventory 24,000
To revalue the inventory and allocate the
loss in value to the partners.
31 Land 96,000
Alana Bruno, Capital 19,200
To revalue the land and allocate the gain in
value to the partners.
b. May 31 Alana Bruno, Capital 122,400

Cash 180,000
To record withdrawal of Bruno from the
partnership.
Calculations:
Loss allocation to the partners:

Bruno: $24,000 × 2/10 = $4,800
Kraft & Hamelin: $24,000 × 4/10 = $9,600
Gain on land revaluation to partners:

Bruno: $96,000 × 2/10 = $19,200
Kraft & Hamelin: $96,000 × 4/10 = $38,400
Bruno’s capital balance = $108,000 – $4,800 + $19,200 = $122,400
Bruno received partnership cash $ 180,000

Bruno’s capital balance at time of withdrawal (122,400)
Loss to be shared by the other partners $ 57,600 (EQUAL SPLIT)

(5–10 min.) E12-15

1. Each partner receives cash equal to his or her capital balance because cash
($115,000) equals total partnership capital:
Jonas ........................................... $ 57,500
Teese .......................................... 34,500
Moyer ......................................... 23,000
Total ........................................... $115,000
2. This company splits losses equally among the three owners. There is a $12,000
loss, so each owner loses $4,000. Therefore,
Jonas receives cash of $53,500 ($57,500 – [($115,000 – $103,000) × 1/3]).
Teese received cash of $30,500 ($34,500 – [($115,000 – $103,000) × 1/3]).
Moyer receives cash of $19,000 ($23,000 – [($115,000 – $103,000) × 1/3]).

(15–20 min.) E12-16

Capital
Noncash Garcia Woods Mickelson
Cash + Assets = Liabilities + (40%) + (30%) + (30%)
Balances before sale of assets $10,000 $62,500 $26,500 $20,000 $15,000 $11,000
Sale of assets and sharing of
gain 78,500 (62,500) 6,400* 4,800* 4,800*
Balances 88,500 0 26,500 26,400 19,800 15,800
Payment of liabilities (26,500) (26,500)
Balances 62,000 0 0 26,400 19,800 15,800
Disbursement of cash to
partners (62,000) (26,400) (19,800) (15,800)
Balances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
* Allocation of gain to partners:

Gain: $78,500 – $62,500 = $16,000
Garcia: $16,000 × 0.40 = $ 6,400
Woods: $16,000 × 0.30 = $ 4,800
Mickelson: $16,000 × 0.30 = $ 4,800

(15–20 min.) E12-17

Noncash Shelly Linus Peter Lebrun Cathy Beale
Cash Assets Liabilities Capital Capital Capital
Balance before sale of assets $ 12,000 $252,000 $154,000 $24,000 $74,000 $12,000
Sale of assets 280,000 (252,000) ________ 5,600 8,400 14,000
Balances $ 292,000 $ 0 $154,000 $29,600 $82,400 $26,000
$280,000 – $252,000 = $28,000 gain to allocate.
Shelly: $28,000 × 0.20 = $5,600
Peter: $28,000 × 0.30 = $8,400
Cathy: $28,000 × 0.50 = $14,000

Problems
Group A
(15–20 min.) P12-1A

Req. 1
General Journal
Date Post.
2023 Account Titles and Explanations Ref. Debit Credit
Jan. 1 Accounts Receivable 30,000
Inventory 62,000
Prepaid Expenses 12,000
Store Equipment 62,000
Sakari Freud, Capital 122,000
To record Freud’s investment in the
partnership.
1 Cash 122,000
Viktor Velichkov, Capital 122,000
To record Velichkov’s investment in the
partnership.
Req. 2
Freud and Velichkov
Balance Sheet
January 1, 2023
Assets Liabilities
Accounts receivable 30,000 Partners’ Equity
Inventory 62,000 Sakari Freud, capital 122,000
Prepaid expenses 12,000 Viktor Velichkov, capital 122,000
Store equipment 62,000 Total partners’ equity 244,000

(continued) P12-1A
Req. 3
Freud and Velichkov
Partnership Capital Balances
December 31, 2023
Freud Velichkov Total
Beginning capital balance $122,000 $122,000 $244,000
Allocate income to partners:
Freud ($343,000 × 0.70) 240,100
Velichkov ($343,000 × 0.30) 0 102,900 343,000
Balance 362,100 224,900 587,000
Ending capital balance $176,100 $95,900 $272,000

Req. 1 (25–30 min.) P12-2A

Sasso, Schwimmer, and Perry
Allocation of Profits and Losses
Sasso Schwimmer Perry Total
a. Total (net loss) $(70,500)
Allocation to the partners:
Sasso ($70,500 × 0.45) $(31,725)
Schwimmer ($70,500 × 0.35) $(24,675)
Perry ($70,500 × 0.20) $(14,100)
Total $(70,500)
Net loss remaining for allocation $ 0
Net loss allocated to partners $(31,725) $(24,675) $(14,100) $(70,500)
b. Total net income $136,500

Sharing of first $45,000 profit based
on capital investments:
Sasso ($60,000/
$360,000 × $45,000) $ 7,500
Schwimmer ($120,000/
$360,000 × $45,000) $ 15,000
Perry ($180,000/
$360,000 × $45,000) $22,500
Total 45,000
Sharing of next $75,000 of profit
based on service:
Sasso 45,000
Schwimmer 30,000
Total 75,000
Remainder shared equally:

Sasso ($16,500 × 1/3) 5,500
Schwimmer ($16,500 × 1/3) 5,500
Perry ($16,500 × 1/3) 5,500
Total 16,500
Net income remaining for allocation 0
Net income allocated to partners $ 58,000 $ 50,500 $28,000 $136,500

(25–30 min.) P12-2A

Req. 1
Sasso, Schwimmer, and Perry
Sasso Schwimmer Perry Total
c. Total net income (loss) $(136,500)
Sharing of first $45,000 profit
Sasso ($60,000/$360,000 ×
$45,000) $ 7,500
Schwimmer ($120,000/
$360,000 × $45,000) $ 15,000
Perry ($180,000/$360,000 ×
$45,000) $ 22,500
Total 45,000
Net income remaining for
allocation (181,500)
based on service:
Sasso 45,000
Schwimmer 30,000
Total 75,000
allocation (256,500)

Sasso ($256,500 × 1/3) (85,500)
Schwimmer ($256,500 × 1/3) (85,500)
Perry ($256,500 × 1/3) (85,500)
Total (256,500)
allocation 0

(continued) P12-2A
Req. 2
SASSO, SCHWIMMER, AND PERRY
Income Statement
For the Year Ended September 30, 2023
Sales revenue $ 858,000
Expenses 721,500
Net income $ 136,500
Allocation of earnings
Sheila Sasso $ 58,000
Karen Schwimmer 50,500
Jim Perry 28,000
Total $ 136,500
Req. 3
This problem will help students learn to allocate partnership profits and losses to the
partners. This allocation is important because one of the main points of contention among
partners is the sharing of profits and losses. Learning this material should help partners
design an agreement that is understandable. In turn, that may help the partners avoid
disagreements.

(25–35 min.) P12-3A

Req. 1
General Journal
Date Post.
Jun. 30 Revenues 748,000
Income Summary 748,000
To close revenues.
30 Income Summary 624,000

Expenses 624,000
To close expenses.

K. Santiago, Capital 15,500
R. Astorga, Capital 46,500
J. Camino, Capital 62,000
To close income summary.
30 K. Santiago, Capital 126,000

K. Santiago, Withdrawals 126,000
30 R. Astorga, Capital 272,000

R. Astorga, Withdrawals 272,000
30 J. Camino, Capital 312,000

J. Camino, Withdrawals 312,000
To close partner withdrawal accounts.
Income Summary balance = $748,000 – $624,000 = $124,000
K. Santiago, Capital – $124,000 × 1/8 = $15,500
R. Astorga, Capital – $124,000 × 3/8 = $46,500
J. Camino, Capital – $124,000 × 4/8 = $62,000

(continued) P12-3A
Req. 2
K. Santiago, Capital
Balance 152,000
Withdrawals 126,000 Net income 15,500
R. Astorga, Capital
Balance 282,000
J. Camino, Capital
Balance 428,000

(15–20 min.) P12-4A

a
General Journal
Post.
Jul. 31 Brian Harmon, Capital 40,000
Bharat Ratta, Capital 40,000
To transfer Harmon’s equity to Ratta.
b.
General Journal
Post.
Jul. 31 Cash 30,000
To admit Ratta as a partner with a one-quarter
interest in the business.
Partnership capital before Ratta is admitted ($20,000 + $30,000 + $40,000) $90,000

Ratta’s investment in the partnership 30,000
Partnership capital after Ratta is admitted $120,000
Ratta’s capital in the partnership ($120,000 × 1/4) $ 30,000

(continued) P12-4A
c
General Journal
Post.
Jul. 31 Cash 30,000
Eleanor Craven, Capital 2,000
Navneet Shelmar, Capital 3,000
Brian Harmon, Capital 5,000
To admit Ratta as a partner with a one-sixth
interest in the business.
Partnership capital before Ratta is admitted ($20,000 + $30,000 + $40,000) $90,000

Ratta’s investment in the partnership 30,000
Partnership capital after Ratta is admitted $120,000
Ratta’s capital in the partnership ($120,000 × 1/6) $ 20,000
Bonus to other partners: $30,000 – $20,000 = $10,000

Then allocate based on 20% for Craven ($2,000), 30% for Shelmar ($3,000), and 50% for
Harmon ($5,000).
a. (20–25 min.) P12-5A

General Journal
Date Post.
Dec. 31 Karen Tenne, Capital 248,000
Michael Adams, Capital 248,000
To record transfer of Tenne’s equity in the
partnership to Adams.
b.
General Journal
Date Post.
Cash 72,000
Note Payable — Karen Tenne 176,000
To record withdrawal of Tenne from the
partnership.

c. (continued) P12-5A
General Journal
Date Post.
Frank Durn, Capital 6,857
Erin Hana, Capital 5,143
Cash 260,000
partnership. Durn has 4/7 of ($248,000 −
$260,000) and Hana has 3/7 of ($248,000 −
$260,000).
d.
General Journal
Date Post.
Dec. 31 Equipment 220,000
Karen Tenne, Capital 66,000
Frank Durn, Capital 88,000
Erin Hana, Capital 66,000
To revalue the equipment and allocate the
gain in value to the partners.

Cash 44,000
Inventory 270,000
partnership. ($248,000 + $66,000)
Equipment: $548,000 – $328,000 = $220,000
Karen Tenne, Capital $220,000 × 0.30 = $66,000
Frank Durn, Capital $220,000 × 0.40 = $88,000
Erin Hana, Capital $220,000 × 0.30 = $66,000

Req. 1 (40–60 min.) P12-6A

Transaction
Date Description Buckner Kwan Nguen Total
2020
Jun. 10 Start-up $ 84,000 81,000 $ 165,000
Dec. 31 Net income 97,500 97,500 195,000
Capital account balances 181,500 178,500 360,000
2021
Jan. 1 New partner 9,000 9,000 162,000 180,000
Capital account balances 190,500 187,500 162,000 540,000
Dec. 31 Net income, allocated as:
Service 90,000 120,000 75,000 285,000
Interest 9,525 9,375 8,100 27,000
Balance 50,400 33,600 84,000 168,000
Total income allocated 149,925 162,975 167,100 480,000
Capital account balances 340,425 350,475 329,100 1,020,000

2022
Oct. 10 Withdrawals (84,000) (57,000) (141,000)
Dec. 31 Net income allocated as:
Service 90,000 120,000 75,000 285,000
Interest 12,821 14,674 16,455 43,950
Balance (22,185) (14,790) (36,975) (73,950)
2023
Jan. 2 Partner withdrawal 50,148 33,432 (383,580) (300,000)
Capital account balances $387,209 $446,791 $ 0 $ 834,000

Req. 1 (continued) P12-6A

General Journal
Post.
Date Account Titles Ref. Debit Credit
2020
Jun. 10 Cash 45,000
Office Furniture 60,000
Adam Buckner, Capital 84,000
Amber Kwan, Capital 81,000

2021
Jan. 1 Cash 180,000
Heidi Nguen, Capital 162,000

2022
Oct. 10 Adam Buckner, Withdrawals 84,000
Amber Kwan, Withdrawals 57,000
Cash 141,000
Dec. 31 Adam Buckner, Capital 84,000

Adam Buckner, Withdrawals 84,000
Amber Kwan, Withdrawals 57,000

2023
Jan. 02 Heidi Nguen, Capital 383,580
Cash 300,000

(continued) P12-6A
Req. 2
B&K CONSULTING
Balance Sheet (partial)
January 2, 2023
Partners’ Equity
Adam Buckner, capital $387,209
Amber Kwan, capital 446,791

(35–45 min.) P12-7A

Req. 1a
Malkin, Neale, and Staal
Summary of Liquidation Transactions
Capital
Noncash Malkin Neale Staal
Balances before sale of
assets $ 41,000 $367,000 $151,000 $57,500 $158,500 $41,000
gain 420,000 (367,000) 10,600* 21,200* 21,200*
Balances 461,000 0 151,000 68,100 179,700 62,200
Balances 310,000 0 0 68,100 179,700 62,200
partners (310,000) (68,100) (179,700) (62,200)
Balances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

Gain: $420,000 – $367,000 = $53,000
Malkin: $53,000 × 0.20 = $10,600
Neale: $53,000 × 0.40 = $21,200
Staal: $53,000 × 0.40 = $21,200

(continued) P12-7A
Req. 1b
Malkin, Neale, and Staal
Capital
Noncash Malkin Neale Staal
assets $ 41,000 $367,000 $151,000 $57,500 $158,500 $ 41,000
Sale of assets and sharing
of loss 338,000 (367,000) (5,800)* (11,600)* (11,600)*
Balances 379,000 0 151,000 51,700 146,900 29,400
Balances 228,000 0 0 51,700 146,900 29,400
partners (228,000) (51,700) (146,900) (29,400)
Balances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
* Allocation of loss to partners:

Loss: $338,000 – $367,000 = ($29,000)
Malkin: ($29,000) × 0.20 = ($ 5,800)
Neale: ($29,000) × 0.40 = ($11,600)
Staal: ($29,000) × 0.40 = ($11,600)

(continued) P12-7A
Req. 2
General Journal
Date Post.
Dec. 31 Cash 338,000
Loss on Disposal 29,000
To record net loss on disposal of noncash
assets.*
31 Lisa Malkin, Capital 5,800

John Neale, Capital 11,600
Brian Staal, Capital 11,600
To transfer net losses to partners’ capital
accounts.*
Cash 151,000
To pay liabilities in liquidation.
31 Lisa Malkin, Capital 51,700

John Neale, Capital 146,900
Brian Staal, Capital 29,400
Cash 228,000
To distribute cash to partners in liquidation.
* Could also show this as one, combined journal entry.

(30–40 min.) P12-8A

Req. 1a
Telliher, Bachra, and Lang
Capital
Noncash Telliher Bachra Lang
Balances before sale of assets $ 6,750 $118,800 $28,350 $46,600 $30,000 $ 20,600
Sale of assets and sharing of loss 36,300 (118,800) (49,500)* (16,500)* (16,500)*
Balances 43,050 0 28,350 (2,900) 13,500 4,100
Balances 14,700 0 0 (2,900) 13,500 4,100
Allocation of Telliher deficiency—no
assets to contribute 0 2,900 (1,450)** (1,450)**
Balances 14,700 0 12,050 2,650
Disbursement of cash to partners (14,700) 0 (12,050) (2,650)
Balances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
* Allocation of loss to partners: ** Allocation of Telliher deficiency to remaining partners:

Loss: $118,800 – $36,300 = ($82,500) Bachra: ($2,900) × 0.20/0.40 = ($1,450)
Telliher: ($82,500) × 0.60 = ($49,500) Lang: ($2,900) × 0.20/0.40 = ($1,450)
Bachra: ($82,500) × 0.20 = ($16,500)
Lang: ($82,500) × 0.20 = ($16,500)

(continued) P12-8A
Req. 1b
Telliher, Bachra, and Lang
Capital
Noncash Telliher Bachra Lang
Balances before sale of assets $ 6,750 $118,800 $28,350 $46,600 $30,000 $20,600
Balances 34,350 0 28,350 (8,120) 11,760 2,360
Balances 6,000 0 0 (8,120) 11,760 2,360
Allocation of Telliher deficiency—no assets to contribute 0 8,120 (4,060)** (4,060)**
Balances 6,000 0 7,700 (1,700)
Allocation of Lang deficiency—no assets to contribute 0 (1,700) 1,700
Balances 6,000 0 6,000 0
Disbursement of cash to partner (6,000) 0 (6,000) 0
Balances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
* Allocation of loss to partners: ** Allocation of Telliher deficiency to remaining partners:

Loss: $118,800 – $27,600 = ($91,200) Bachra: ($8,120) × 0.20/0.40 = ($4,060)
Telliher: ($91,200) × 0.60 = ($54,720) Lang: ($8,120) × 0.20/0.40 = ($4,060)
Bachra: ($91,200) × 0.20 = ($18,240)
Lang: ($91,200) × 0.20 = ($18,240)
Req. 2
If some partners have no personal assets, the other partners must absorb the deficit balance to liquidate the partnership. They can then
personally sue the partner for the deficit. Caution would need to be exercised because if there is no money to pay the deficit, then there
is likely no money to pay the lawsuit.

Problems
Group B
Req. 1 (15–20 min.) P12-1B

General Journal
Date Post.
Jan. 1 Accounts Receivable 30,000
Inventory 48,000
Prepaid Expenses 4,000
Office Equipment 62,000
Toutorix Fabien, Capital 96,000
To record Fabien’s investment in the
partnership.
1 Cash 96,000
Sari Buchanan, Capital 96,000
To record Buchanan’s investment in the
partnership.
Req. 2
BUCHANAN AND FABIEN
Balance Sheet
January 1, 2023
Assets Liabilities
Cash $96,000 Accounts payable $ 48,000
Accounts receivable 30,000
Inventory 48,000 Partners’ Equity
Prepaid expenses 4,000 Sari Buchanan, capital 96,000
Office equipment 62,000 Toutorix Fabien, capital 96,000

(continued) P12-1B
Req. 3
Buchanan and Fabien
Partnership Balances
December 31, 2023
Buchanan Fabien Total
Beginning Balance $96,000 $96,000 $192,000
Allocation of net income to partners:
Buchanan ($297,000 × 1/3) 99,000
Fabien ($297,000 × 2/3) 198,000 297,000
Balance 195,000 294,000 489,000
Ending Capital Balance $133,000 $208,000 $ 341,000
Req. 1 (25–30 min.) P12-2B

Berlo, Felini, and Valente
Berlo Felini Valente Total
a. Total net income (net loss) $(200,000)
Berlo ($200,000 × 0.40) $(80,000)
Felini ($200,000 × 0.25) $(50,000)
Valente ($200,000 × 0.35) $(70,000)
Total $(200,000)
Net loss remaining for
allocation $ 0
(Continued on next page)

(continued) P12-2B
Req. 1
Berlo, Felini, and Valente
Berlo Felini Valente Total
b. Total net income $354,000
Sharing of first $150,000 of profit
Berlo ($30,000/$120,000 ×
$150,000) $37,500
Felini ($40,000/$120,000 ×
$150,000) $50,000
Valente ($50,000/ $120,000
× $150,000) $62,500
Total 150,000
allocation 204,000
based on service:
Berlo 56,000
Felini 16,000
Total 72,000
allocation 132,000

Berlo ($132,000 × 1/3) 44,000
Felini ($132,000 × 1/3) 44,000
Valente ($132,000 × 1/3) 44,000
Total 132,000
allocation 0
Net income allocated to partners $137,500 $110,000 $106,500 $354,000

(continued) P12-2B
Req. 2
BERLO, FELINI, AND VALENTE
Income Statement
For the Year Ended January 31, 2023
Revenue $1,014,000
Expenses 660,000
Net income $ 354,000
Allocation of earnings
Berlo $ 137,500
Felini 110,000
Valente 106,500
Total $ 354,000
Req. 3
This problem will help students learn to allocate partnership profits and losses to the
partners. This allocation is important because one of the main points of contention among
partners is the sharing of profits and losses. Learning this material should help partners
design an agreement that is understandable. In turn, that may help the partners avoid
disagreements.

(25–35 min.) P12-3B

Req. 1
General Journal
Date Post.
Sep. 30 Revenues 928,000
To close revenues.

Expenses 796,000
To close expenses.

T. Shitang, Capital 26,400
D. Yamamoto, Capital 39,600
J. Ishikawa, Capital 66,000
To close income summary.
30 T. Shitang, Capital 99,000

T. Shitang, Withdrawals 99,000
30 D. Yamamoto, Capital 81,000

D. Yamamoto, Withdrawals 81,000
30 J. Ishikawa, Capital 40,000

J. Ishikawa, Withdrawals 40,000
To close partner withdrawal accounts.
Income Summary: $928,000 – $796,000 = $132,000
Shitang: $132,000 × 2/10 = $26,400
Yamamoto: $132,000 × 3/10 = $39,600
Ishikawa: $132,000 × 5/10 = $66,000

(continued) P12-3B
Req. 2
T. Shitang, Capital
Balance 125,000
D. Yamamoto, Capital
Balance 97,000
J. Ishikawa, Capital
Balance 46,000

(15–20 min.) P12-4B

a.
General Journal
Date Post.
Mar. 31 Jennifer Lowe, Capital 150,000
Helen Fluery, Capital 150,000
To transfer J. Lowe’s equity in the
partnership to H. Fluery.
b.
General Journal
Date Post.
Mar. 31 Cash 100,000
To admit H. Fluery as a partner with a
one-fourth interest in the business.
Partnership capital before Fluery is admitted ($50,000 + $100,000 + $150,000) $300,000

Fluery’s investment in the partnership 100,000
Partnership capital after Fluery is admitted $400,000
Fluery’s capital in the partnership ($400,000 × 1/4) $100,000

(continued) P12-4B
c.
General Journal
Date Post.
Mar. 31 Cash 80,000
Jim Zook, Capital 6,000
Richard Land, Capital 3,000
Jennifer Lowe 6,000
To admit Helen Fluery as a partner with a one-
fourth interest in the business.
Partnership capital before Fluery is admitted ($50,000 + $100,000 + $150,000) $300,000

Fluery’s investment in the partnership 80,000
Partnership capital after Fluery is admitted $380,000
Fluery’s capital in the partnership ($380,000 × 1/4) $ 95,000
Reduction of other partners’ capital balance:

$95,000 – $80,000 = $15,000
Zook: $15,000 × 0.40 = $6,000
Land: $15,000 × 0.20 = $3,000
Lowe: $15,000 × 0.40 = $6,000

a. (20–25 min.) P12-5B

General Journal
Date Post.
Dec. 31 Sam Seamus, Capital 210,000
Rea Pearlman, Capital 210,000
To record transfer of Seamus’s equity in the
partnership to Pearlman.
b.
General Journal
Date Post.
Cash 163,000
Note Payable to Seamus 47,000
To record withdrawal of Seamus from the
partnership.
c.
General Journal
Date Post.
Katherine Depatie, Capital 42,000
Emily Hudson, Capital 84,000
Cash 336,000
partnership.
Depatie: $126,000 × 0.20/0.60 = $42,000

Hudson: $126,000 × 0.40/0.60 = $84,000

d. (continued) P12-5B
General Journal
Date Post.
Dec. 31 Katherine Depatie, Capital 25,200
Sam Seamus, Capital 50,400
Emily Hudson, Capital 50,400
Building 126,000
To revalue the building and allocate the loss in
value to the partners.

Cash 82,000
Note Payable — Seamus 77,600
partnership. ($210,000 – $50,400)
Building loss: $808,000 – $682,000 = $126,000

Depatie: $126,000 × 0.20 = $25,200
Seamus: $126,000 × 0.40 = $50,400
Hudson: $126,000 × 0.40 = $50,400

Req. 1 (40–60 min.) P12-6B

Transaction
Date Description Hodgson Asham Sirroca Total
2020
Jun. 10 Start-up $111,000 $ 84,000 $195,000
Dec. 31 Net income 114,000 114,000 228,000
Capital account balances 225,000 198,000 423,000
2021
Jan. 01 New partner (21,600) (21,600) 253,200 210,000
Dec. 31 Net income, allocated as:
Service 120,000 90,000 80,000 290,000
Interest 20,340 17,640 25,320 63,300
Balance 43,340 65,010 108,350 216,700

2022
Oct. 10 Withdrawals (90,000) (60,000) _______ (150,000)
Dec. 31 Net income

Service 120,000 90,000 80,000 290,000
Interest 29,708 28,905 46,687 105,300
Balance (34,060) (51,090) (85,150) (170,300)
Total Income Allocated 115,648 67,815 41,537 225,000
2023
Jan. 02 Partner withdrawal* (637) (956) (508,407) (510,000)
Capital account balances $412,091 $ 355,909 $ 0 $768,000
* Payment of $510,000 is first allocated to the account of Sirroca. The difference of $1,593
($510,000 – $508,909) is split between the remaining partners.
Hodgson: $1,593 × 2/5 = $637
Asham: $1,593 × 3/5 = $956

Req. 1 (continued ) P12-6B

General Journal
Post.
Date Account Titles Ref. Debit Credit
2020
Jun. 10 Cash 57,000
Office Furniture 75,000
Steven Hodgson, Capital 111,000
Sarah Asham, Capital 84,000

2021
Jan. 1 Cash 210,000
Myra Sirroca, Capital 253,200

2022
Oct. 10 Steven Hodgson, Withdrawals 90,000
Sarah Asham, Withdrawals 60,000
Cash 150,000
Dec. 31 Steven Hodgson, Capital 90,000

Steven Hodgson, Withdrawals 90,000
Sarah Asham, Withdrawals 60,000

2023
Jan. 02 Myra Sirroca, Capital 508,407
Steven Hodgson, Capital 637
Sarah Asham, Capital 956
Cash 510,000

(continued) P12-6B
Req. 2
H&A DISTRIBUTORS
Balance Sheet (partial)
January 2, 2023
Partners’ Equity
Steven Hodgson, Capital $412,091

(35–45 min.) P12-7B

Req. 1a
Du, Chong, and Smith
Capital
Noncash Du Chong Smith
Balances before sale of assets $ 70,000 $526,000 $316,000 $80,000 $102,000 $ 98,000
gain 552,000 (526,000) 2,600* 7,800* 15,600*
Balances 622,000 0 316,000 82,600 109,800 113,600
Balances 306,000 0 0 82,600 109,800 113,600
partners (306,000) (82,600) (109,800) (113,600)
Balances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

Gain: $552,000 – $526,000 = $26,000
Du: $26,000 × 0.10 = $ 2,600
Chong: $26,000 × 0.30 = $ 7,800
Smith: $26,000 × 0.60 = $ 15,600

(continued) P12-7B
Req. 1b
Du, Chong, and Smith
Capital
Noncash Du Chong Smith
assets $ 70,000 $ 526,000 $316,000 $ 80,000 $ 102,000 $ 98,000
loss 448,000 (526,000) (7,800)* (23,400)* (46,800)*
Balances 518,000 0 316,000 72,200 78,600 51,200
Balances 202,000 0 0 72,200 78,600 51,200
partners (202,000) (72,200) (78,600) (51,200)
Balances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
* Allocation of loss to partners:

Loss: $526,000 – $448,000 = ($78,000)
Du ($78,000) × 0.10 = ($ 7,800)
Chong: ($78,000) × 0.30 = ($23,400)
Smith: ($78,000) × 0.60 = ($46,800)

(continued) P12-7B
Req. 2
General Journal
Date Post.
Dec. 31 Cash 448,000
To record net loss on disposal of noncash
assets.
31 Jia Du, Capital 7,800

Denis Chong, Capital 23,400
Alan Smith, Capital 46,800
To transfer net losses to partners’ capital
accounts.
Cash 316,000
To pay liabilities in liquidation.
31 Jia Du, Capital 72,200

Denis Chong, Capital 78,600
Alan Smith, Capital 51,200
Cash 202,000
To distribute cash to partners in liquidation.

(30–40 min.) P12-8B

Req. 1a
Pavelski, Ovechin, and Oh
Capital
Noncash Pavelski Ovechin Oh
Balances before sale of assets $ 27,000 $475,200 $113,400 $186,400 $ 120,000 $82,400
Balances 172,200 0 113,400 (11,600) 54,000 16,400
Balances 58,800 0 0 (11,600) 54,000 16,400
Allocation of Pavelski deficiency—no assets to contribute 0 11,600** (5,800)** (5,800)**
Balances 58,800 0 48,200 10,600
Disbursement of cash to partners (58,800) 0 (48,200) (10,600)
Balances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
* Allocation of loss to partners: ** Allocation of Pavelski deficiency to remaining partners:

Loss: $475,200 – $145,200 = ($330,000) Ovechin: ($11,600) × 0.20/0.40 = ($5,800)
Pavelski: ($330,000) × 0.60 = ($198,000) Oh: ($11,600) × 0.20/0.40 = ($5,800)
Ovechin: ($330,000) × 0.20 = ($66,000)
Oh: ($330,000) × 0.20 = ($66,000)

Req. 1b (continued) P12-8B

Pavelski, Ovechin, and Oh
Capital
Noncash Pavelski Ovechin Oh
Balances before sale of assets $ 27,000 $475,200 $113,400 $ 186,400 $120,000 $ 82,400
Sale of assets and sharing of loss 110,400 (475,200) (218,880)* (72,960)* (72,960)
Balances 137,400 0 113,400 (32,480) 47,040 9,440
Balances 24,000 0 (32,480) 47,040 9,440
Allocation of Pavelski deficiency—no assets to contribute 0 0 0 32,480** (16,240)** (16,240)**
Balances 24,000 0 0 0 30,800 (6,800)
Allocation of Oh deficiency—no assets to contribute 0 0 0 0 (6,800) 6,800
Balances 24,000 0 0 0 24,000 0
Disbursement of cash to partners (24,000) 0 0 0 (24,000) 0
Balances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
* Allocation of loss to partners: ** Allocation of Pavelski deficiency to remaining partners:

Loss: $475,200 – $110,400 = ($364,800) Ovechin:($32,480) × 0.20/0.40 = ($16,240)
Pavelski: ($364,800) × 0.60 = ($218,880) Oh: ($32,480) × 0.20/0.40 = ($16,240)
Ovechin: ($364,800) × 0.20 = ($72,960)
Oh: ($364,800) × 0.20 = ($72,960)
Req. 2
If one partner has no capital and cannot personally cover the deficit, then the deficit must be covered by the other partners. They
can then personally sue the partner for the deficit.

Using Excel
(15–20 min.)
The student templates for Using Excel are available online in MyLab Accounting in the
Multimedia Library. The solution to Using Excel is located in MyLab Accounting in the
Instructor Resource Centre.
Serial Exercise
(20–25 min.)
Req. 1
Date
Jan. 1 Cash 36,000
Amber Wilson, Capital 12,000
Jean Turner, Capital 12,000
Oscar White, Capital 12,000
To record the initial capital contributions and allocate
them to partners’ capital accounts.
Req. 2
Date
Dec. 31 Amber Wilson, Capital 6,500
Jean Turner, Capital 2,000
Oscar White, Capital 3,500
To allocate the loss to the partners’ capital accounts.
Wilson Turner White Total

Salary $ 0 $ 11,000 $ 16,000 $ 27,000
Ratio (1/6, 2/6, 3/6) (6,500) (13,000) (19,500) (39,000)
Net loss allocated $ (6,500) $ (2,000) $ (3,500) $ (12,000)

(continued)
Req. 3
Date
2024 Accounts and Explanation Debit Credit
Dec. 31 Amber Wilson, Capital 5,500
Cash 4,000
Jean Turner, Capital 600
Oscar White, Capital 900
To record the withdrawal of Amber Wilson from the
partnership and allocate the bonus to the remaining
partners. ($1,500 gain split using 2:3 profit-and-loss-
sharing ratio. Turner: $1,500 x 2/5, White: $1,500 x
3/5)
Req. 4
Turner White Total

Capital, January 1, 2024 $ 0 $ 0 $ 0
Additional Investments 12,000 12,000 24,000
Net loss (2,000) (3,500) (5,500)
Withdrawal of Amber Wilson 600 900 1,500
Capital, December 31, 2024 $10,600 $ 9,400 $ 20,000

Challenge Exercise
(20–30 min.)
Req. 1
AUSTIN AND MUNDY
Balance Sheet
December 31, 2023
Assets
Cash $ 55,000
Accounts receivable (net) 135,000
Inventory 410,000
Equipment (net) 825,000
Total assets $1,425,000
Liabilities
Accounts payable $170,000
Accrued expenses payable 20,000
Notes payable 275,000
Total liabilities $ 465,000
Partners’ Equity
Jim Austin, capital 480,000*
Mike Mundy, capital 480,000*
Total liabilities and equity $1,425,000
* Total assets – Total liabilities = Partner capital

Austin: $885,000 – ($120,000 + $10,000 + $275,000) = $480,000
Mundy: $540,000 – ($50,000 + $10,000) = $480,000
Note: All amounts are the sum of the current market values of the assets, liabilities, and
capital of the two proprietorships. For example, Cash of $55,000 = $30,000 + $25,000 and
accounts receivable (net) of $135,000 = $100,000 + $35,000.
Req. 2
Austin ............................. $480,000
Mundy ............................ 480,000
Allen .............................. 212,000
Total ............................... 1,172,000
¼ of $1,172,000 = $293,000
Therefore, bonus to new partner = $293,000 – $212,000 = $81,000

(continued)
General Journal
Date Post.
Jan. 1 Cash 212,000
Jim Austin, Capital 48,600
Mike Mundy, Capital 32,400
John Allen, Capital 293,000
Austin: $48.600 = 0.60 × $81,000

Mundy: $32,400 = 0.40 × $81,000
Req. 3
The old partnership agreement with Jim and Mike will have to be dissolved and a new
agreement formed to include John. During the formation of the new agreement, a new
profit-and-loss-sharing formula will be agreed upon.

Beyond the Numbers

(20-30 min.) BN12-1
Req. 1
Areas of dispute that might be resolved by a partnership agreement (only five
are required):
a. Method of sharing profits and losses by the partners
b. Withdrawals of assets by the partners
c. Procedures for settling disputes between the partners
d. Procedures for admitting new partners
e. Procedures for settling up with a partner who withdraws from the
business or dies
f. Procedures for liquidating the partnership.
g. Procedures for removing a partner who will not withdraw or retire from
the partnership voluntarily.
Req. 2
The unlimited personal liability of a partner for all the liabilities of the
business makes it wise to select a partner with more wealth than you. That
way, if the partnership falls into debt, your partner can help meet these
obligations. If you are richer than your partner, most of the business’s debts
could be your responsibility to pay.
Req. 3
To convert her share of partnership assets to cash, Clamath can:
a. Sell her share to existing partners (same as withdrawing from the
partnership).
b. Sell her share to an outsider if the remaining partners agree to admit the
person. That person will obtain Clamath’s share of the business’s net
assets, profits, and losses.

Ethical Issue
(10 min.) EI12-1
Req. 1
Correct entry: Feng Li, Withdrawals ....................... 3,000
Inventory .................................. 3,000
Req. 2
Li’s action appears unethical because she took merchandise costing $3,000
and did not record it properly. Her entry labels the cost of the inventory as
expense. Instead, it was a personal withdrawal. Li appears to be stealing
from her partner. She is also reducing the taxes payable to the government
illegally.
The owners seem to keep their work, earnings, and withdrawals relatively
even. Small, roughly equal withdrawals of inventory for personal use
maintain fairness to both owners. However, $3,000 appears significant and
should be recorded as a withdrawal. The partners should agree on the value
of inventory that could be taken without charge.

Challenge Problems
P12-1C
There are two issues:
• If they borrow, what is the cost of the additional funds that must be
met? The cost is tax deductible but they must service the debt. By
taking on partners or by selling shares, they would not have to pay out
an annual cost—i.e., if there are no profits, then there will be no
distribution to partners or shareholders.
• There would be a loss of control if they take on more partners or if they
incorporate and sell shares, but no annual charge for funds would be
needed.
They need not lose control if they issued preferred shares to the investors.
They could also issue common shares and make their shares Class A shares
with multiple votes and issue Class B shares with only one vote each.
I would recommend that they form a company with a structure so that they
maintain the control but give the investors the inducement of sharing the
profits.

P12-2C
Perrier Salter Patten Total

Capital @ 6% $13,725 (a) $65,475 (b) $29,475 (c) $108,675
Service 75,000 9,375 75,000 159,375
268,050
Distribution 52,780 (d) 26,390 (e) 52,780 (d) 131,950
$141,505 $101,240 $157,255 $400,000
The student should suggest a new partnership agreement that will recognize the partner
concerns.
Calculations for allocation to partners:
(a) $228,750 × 0.06 = $13,725
(b) $1,091,250 × 0.06 = $65,475
(c) $491,250 × 0.06 = $29,475
(d) ($400,000 – $268,050) × 0.40 = $52,780
(e) ($400,000 – $268,050) × 0.20 = $26,390

Decision Problems
(10–15 min.) DP12-1
Req. 1
The ratio of partner capital balance at December 31, 2023, is Barclay 59.2
percent (that is, $152,500/$257,500) and Resultan 40.8 percent (that is,
$105,000/$257,500). This approximately 3:2 (60:40) ratio of capital balances
differs from the 2:1 ratio of partner investments and profit sharing because of
partner withdrawals. Barclay has withdrawn a higher proportion of her
partnership profits than Resultan has. Thus, Barclay’s capital balance is only
approximately six-tenths of the total partnership capital rather than two-
thirds.
Req. 2
Resultan may be unhappy because Barclay withdraws proportionately more
of her partnership profits than Resultan does. Barclay’s withdrawals for
personal use reduce the assets available for business use. Resultan, on the
other hand, leaves a higher proportion of her profits in the business. Resultan
may believe her contribution to revenues is not given enough weight in the
profit sharing.
Req. 3
Barclay is correct in a strict legal sense. The omitted revenue is an element
of profit, which the partners share in the 2:1 profit-and-loss-sharing ratio.
From a practical standpoint, the sharing of the revenue may be debatable. If
Resultan’s efforts clearly earned the revenue, she may be able to convince
Barclay to alter the profit-and-loss-sharing ratio. If Barclay will not budge,
she may lose Resultan as a partner.
Req. 4
An expense is like a loss, which the partners share based on their profit-and-
loss-sharing ratio, not based on capital balances.

(10–15 min.) DP12-2

1. The five areas of disputes that might be settled by a written partnership agreement are
disagreements between partners as to the following:
i. The duties and responsibilities of each partner
ii. The procedures for admitting a new partner
iii. How profits and loss are distributed
iv. How assets may be withdrawn from the partnership
v. The procedures pertaining to the withdrawal of a partner
2. Don Loomis has several options available to him with respect to withdrawing from the
partnership. Loomis can sell his percentage in the partnership for cash to another party
in a personal transaction, as long as this party is acceptable to the other partners. He
may sell his partnership interest to a new party from outside the partnership at book
value, at an amount greater than book value, or at an amount less than book value He
may also sell his partnership stake to the existing partners at book value, at an amount
less than book value, or at an amount greater than book value. The partnership can also
be dissolved and liquidated.

Financial Statement Case

(15–20 min.) FSC12-1
Req. 1
2023 2019
Revenues
(Thousands) Amount Percentage Amount Percentage
Assurance $1,234 41% $1,070 54%
Consulting 1,007 34 349 18
Tax 743 25 557 28
Total revenues $2,984 100% $1,976 100%
Consulting services grew the most from 2019 to 2023.
Req. 2
Total revenues ................................................................................. $2,984,000
Average number of partners .............................................................. ÷ 9
Average revenue per partner ............................................................. 331,556
Number of hours worked per year .................................................... ÷ 1,900
Average amount charged by a partner
for one hour of his/her time .............................................................. $ 174.5
Req. 3
Income to partners ............................................................................. $1,057,000
Average number of partners .............................................................. ÷ 9
Average net income per partner ........................................................ $ 117,444

M12 MILL3060 12ce ISM C12

Uploaded by

Copyright:

Available Formats

You might also like

M12 MILL3060 12ce ISM C12

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

M12 MILL3060 12ce ISM C12

Uploaded by

Copyright:

Available Formats

Chapter 12

12-940 Copyright © 2023 Pearson Canada Inc.

7. A partnership balance sheet reports partner capital for each partner. A

Copyright © 2023 Pearson Canada Inc. 12-941

16. Dissolution is the termination of a partnership. Dissolution may occur

12-942 Copyright © 2023 Pearson Canada Inc.

(10 min.) S12-2

Copyright © 2023 Pearson Canada Inc. 12-943

(5–10 min.) S12-3

Oct. 15 Cash 600,000

Total Assets = $600,000 + $80,000 + $100,000 + $90,000 = $870,000

Verify that A = L + E: $870,000 = $110,000 + $760,000

(15 min.) S12-4

12-944 Copyright © 2023 Pearson Canada Inc.

(5–10 min.) S12-5

(10 min.) S12-6

a. Sharing of first $40,000 of net income

b. Sharing of next $30,000 based on service:

c. Remainder shared equally:

Net income allocated to the partners $43,000 $18,000 $33,000 $94,000

Copyright © 2023 Pearson Canada Inc. 12-945

(5–10 min.) S12-7

(5–10 min.) S12-8

12-946 Copyright © 2023 Pearson Canada Inc.

(5–10 min.) S12-9

Copyright © 2023 Pearson Canada Inc. 12-947

(10 min.) S12-10

May 21 Cash 70,000

(5–10 min.) S12-11

12-948 Copyright © 2023 Pearson Canada Inc.

(5–10 min.) S12-12

Aug. 31 Sean, Capital 40,000

(10–15 min.) S12-13

b. Jul. 31 Simpson, Capital 32,000

Simpson & Job .............................. $5,000 = ($20,000 × ¼)

Copyright © 2023 Pearson Canada Inc. 12-949

(10 min.) S12-14

*Loss = $90,000 – $80,000 = $10,000

12-950 Copyright © 2023 Pearson Canada Inc.

(10 min.) S12-15

31 Ryan Lauren, Capital 34,000

(5–10 min.) S12-16

Copyright © 2023 Pearson Canada Inc. 12-951

(10–15 min.) E12-2

12-952 Copyright © 2023 Pearson Canada Inc.

(10 min.) E12-3

* equipment value is $8 ($14 – $6)

Copyright © 2023 Pearson Canada Inc. 12-953

(10–15 min.) E12-4

Dec. 31 Cash 3,000

12-954 Copyright © 2023 Pearson Canada Inc.

(10–15 min.) E12-5

Copyright © 2023 Pearson Canada Inc. 12-955

(15–20 min.) E12-6

b. Danolo [$96,000/($96,000 + $168,000) × $105,600] $ 38,400

c. Total net income $264,000

Sharing based on service:

12-956 Copyright © 2023 Pearson Canada Inc.